i2 Technologies, Inc.

Case Study

Internet Business Models

MKT 6222

March 14, 2001

 

 

 

Team:

Yong Cui

John Gaetz

Rebecka Jenkins

Bo Liu

Rachel Mieras

Ernest Ruiz


 

 

 

Introduction

 

As you walk into the lobby at One i2 place, on Luna Road, in Dallas, Texas, you see a lot of activity.  The adage that states “Nothing is constant, except change” is paramount here at i2.  Changes in the lobby are taking place that in some way reflect the changes that are ongoing at i2.  As an Internet company, http://www.i2.com, dependent on its ability to exploit or at least keep pace with all the implications of Internet time, speed is of the essence.  There is a battle going on, a battle to the death – winner take all.  The battleground is supply chain management software, the foot soldiers are the scores of sales, consultants and PHDs involved in selling, installing and innovating supply chain management concepts into real software where they can be applied to solve real world situations.  The rewards are an emerging $8 billion dollar SCM market by 2002.  As the first quarter of 2001 comes to a close, i2 stock is at an all time low of about $20.00 per share, from a high of $200, employee stock is virtually worthless at this level, Nike recently blamed i2 for failure to meet its earnings target – citing the complexity to implement the i2 software, and to top it off, a group of shareholders is suing i2 for failure to disclose pertinent information that negatively impacted the stock price.  How did this happen to a company that was flying high and could do no wrong?  What implications do these situations have on the future of i2 and how should i2 react and overcome the challenges of competitors and adopt to the changing Internet business environment? To view more information on i2 stock and performance click on the following link - http://biz.yahoo.com/p/i/itwo.html

 

Figure A – Projections of Internet Commerce

Company History

i2 Technologies, Inc. was founded in Irving, Texas in 1988 by Sanjiv Sidhu and Ken Sharma.  Sanjiv was an engineer in the Artificial Intelligence group at Texas Instruments (TI) - http://www.ti.com in Dallas, TX.  While working at TI, Sanjiv realized that it was not possible for even the most gifted persons to be able to make decisions in which the number of input variables was greater than nine.  What Sanjiv proposed to TI was to integrate artificial intelligence principles and advanced process modeling to create a computer-based system of modeling real-world business situations with which to make more efficient and intelligent decisions.  Not finding support for his ideas at TI, Sanjiv resigned and subsequently founded i2 with Ken.  Prior to his co-founding of i2 with Sanjiv, Ken Sharma realized limitations with the embedded business logic found in the extant materials requirements planning (MRP) software in use by operations planners.  He proceeded to work on the development of a new planning system with Eliyahu M. Goldratt, author of “The Goal – A Process of Ongoing Improvement”, who had identified a process called bottleneck scheduling, which in turn was influential in the development of the supply chain models developed by Sanjiv and Ken for i2.  The i2 planning software model came to place importance of limitations on capacity at various stages of production.  The current MRP software models in use were inherently inferior to those being developed by i2 in that there was no means to take concurrent account of both material and capacity constraints, so it was necessary to repeat the process over numerous generations, wasting valuable time and resources.  The ability of the i2 model to address these concurrent interdependent variables made acquiring a solution much easier and more logical.

 

Evolution of the i2 Product

A significant portion of i2’s success, in recent years, can be attributed to the advances in computing, networking, and the Internet.  The very low price of microcomputer main memory facilitated the use of i2 products due to the fact the software remained resident in memory during execution.  This allowed the entire program to be run exclusively from memory, thereby achieving a tremendous increase in speed compared to nonresident programs.  The decrease in running time of i2’s products led to the ability to do essentially real-time calculations of delivery dates and order completion.  Complex decisions could now be executed quickly and with confidence by running various simulations with different variables and observing the outcomes.  The development of object-oriented programming methodologies in the early 1990’s and the subsequent use of object-orientation in the design and implementation of i2’s modeling systems allowed a much cleaner user interface to be developed that allowed i2’s software offerings to interface seamlessly with existing enterprise resource planning (ERP) systems as well as older planning software in use by many companies.  The object orientation also benefited the i2 programmers in that it separated the business logic from the data management modules of the programs, allowing them to make changes to one without affecting the other.  Advances in networking also played a role in i2’s success in that it made enterprise-wide data access possible.  As an extension of this, the development of the World Wide Web in 1993 paved the way for expansion into providing platforms for E-Business solutions.  Their initial planning software package, RHYTHM, was comprised of 5 modules designed to represent all stages of the supply chain in manufacturing.  The past few years have demonstrated the dynamic expansion of the company in the acquisition of a number of key SCP vendors.  This has greatly extended the range of the planning software solutions currently available.  The merger with Think Systems provided much of the bulk of i2’s flagship planning module, Demand Planner.  The union with Optimax Systems allowed i2 to augment its factory scheduling software, leading to improvements in Factory Planner.  Another RHYTHM planning module, Transportation Planner, was improved by the purchase of InterTrans Logistics Solutions.  Probably the most critical merger occurred in 1998 with Aspect Development for the purchase price of $9.3 billion, a record for software mergers.  With the inclusion of the Aspect product line and knowledge base, i2 was able to provide a complete range of products that support supply chain decision making, a powerful argument toward interoperability and continuity of supply chain decision modeling and expectations.

Figure B – The Evolution of the i2 Product.

For additional information on the i2 products go to the i2 web site at http://www.i2.com/ main/server_navigation/skeletons/i2_/templates/ty/

Extensions of Business

In the past few years, i2 has reinvented itself as not only being merely a supply chain decision process solution provider but also a provider of electronic business process optimization (e-BPO) software.  In his keynote address at Planet ’98, i2’s annual conference, CEO Sanjiv Sidhu pitched this new business goal as being the logical extension of i2’s current dominance at creating scientific models of real-world business situations.  Yet another niche the company is striving to dominate is in providing an e-commerce marketplace template for B2B and B2C transactions.  The current product, TradeMatrix, has been engineered in similar fashion to RHYTHM in building upon an open systems architecture to create an architecture-neutral product environment that will work well with a wide variety of extant systems.

Figure C – The i2 Product Platform

The Industry

i2 has made great strides in the Enterprise Application (EA) market and carved themselves a very competitive niche in large part due to their unique enterprise offerings.  The EA market is divided into two principle divisions, Enterprise Resource Planning (ERP) and Supply Chain Management (SCM).  ERP is concerned with supporting a transaction process environment, made accessible by a single relational database and user interface.  Companies presenting this sort of software systems are SAP - http://www.sap.com/, Oracle - http://www.oracle.com/, J.D. Edwards - http://www.jdedwards.com/, and PeopleSoft - http://www.peoplesoft.com/ .  The other division of EA is Supply Chain Management (SCM).  The goal of this type of software system is to analyze, optimize, and make decisions about the supply chain.  SCM, in turn, is comprised of   two further subdivisions, Supply Chain Planning (SCP), and Supply Chain Execution (SCE).  The former is concerned with applying process modeling to study and evaluate decisions made in the supply chain side of business.  The SCM industry leaders are i2, Manugistics - http://www.manugistics.com/ , and Logility - http://www.logility.com/ .  SCE software is designed with transport considerations and warehouse and ordering logistics in mind.  Companies represented by this form of SCM are EXE Technologies, McHugh Software, and IMI.  The revenues of SCE companies fell far below those of ERP vendors, such as SAP, or SCP vendors, such as i2.  Figure E, shows the Gartner Group’s SCP Magic Quadrant for Supply Chain Management Software vendors.  This diagram shows i2 clearly outpacing the market in visionary and ability to execute.

 

ERP revenues in 1997 were estimated at $10.6 billion, with an annual growth rate of 37% between 1992 and 1997.  SCP, in sharp contrast, yielded 1997 revenues of $829 million, with annual growth rates of 192% during 1995 to 1997.  Thus, supply chain planning has become the fastest growing and most profitable branch of Enterprise Planning, with projected 2002 revenue of $8 billion and a 57% compounded annual growth rate.  This trend is reflected in the success of i2, which has grown to over 5,000 employees as of present with current assets figured at $1.078 billion, and 2000 revenues of $1.126 billion.

Figure D – i2 Net Income (Profit) through 1999

For additional financial information see the i2 web site at  http://www.i2.com/ and click Investor Relations


Due to the pioneering efforts of i2 in building the supply chain decision process models, the sheer volume of man-hours in real-world expertise in solving numerous client problems and in the vast reserves of heuristic programming knowledge accumulated by i2 programmers over the years, i2 has emerged as the dominant player in supply chain management software solutions and has captured much of the ERP integration market share by engineering their products to work seamlessly with existing ERP and legacy planning software packages and by the superiority of their concerted approach. 

Partners

i2 Technologies has many partners and alliances world-wide.  These alliances add value to the company’s customers by “facilitating the implementation of high value solutions, and the integration of i2 software with other key strategic solutions.”  By forming alliances and partnerships, i2 can enhance the business solutions they create for their customers.  Alliances of i2 can be broken down into four main categories:

Enterprise Resource Planning (ERP) Vendors

Consulting Companies

Platform Providers and

Software Providers

All four groups serve as complements to i2’s offerings.  ERP Vendors develop and sell enterprise resource planning solutions to integrate with i2 solutions.  Although growing in competition, they still work with each other to ensure a seamless solution.  Partners in this group include J.D. Edwards, Oracle Corporation and SAP AG.  Consulting Companies provide assistance to i2’s customers in the areas of strategy, change management, and packaged implementation of software solutions. i2 has three categories of consulting partners, Global Firms (Accenture, IBM Global Services, PricewaterhouseCoopers to name a few), Implementation Firms (MetaLogic Systems, UEC, eJiva and others) and Authorized Firms (CMG, eForce, The Revere Group, Sabre Information Systems,  as examples).  Platform Providers  develop computer system platforms to support i2 solutions.  Compaq, Fujitsu Siemens, HP and IBM are just some providers in this category. Finally, Complimentary Software Providers develop software to complement i2 solutions through application functionality or technology enablement.  Ariba, Broadvision and Wingsoft Corporation are some of these software providers.

 

Two very big alliances for i2 were recently announced.  On February 14, 2001, i2 and BroadVision announced a partnership in Europe, Middle East and Africa (EMEA).  This combination is designed to join i2’s Customer Relationship Management and Content Solutions with BroadVision’s wide array of e-commerce and relationship management applications to provide a superior solution to manage the entire e-commerce value chain.  The value added to the customer by this alliance is in time-to-market reduction and reduced cost of ownership while they are establishing new e-businesses.  On February 26, 2001, i2 Technologies and Intel Corporation announced an e-business alliance.  This partnership can be viewed as both a promotional and distribution alliance.  It is designed to speed up the deployment of e-marketplace and SCM applications designed by i2 and powered by Intel-based servers.  This alliance is set to span from the products’ development to deployment.  It will add value to the end customer by allowing them to handle many operations while at the same time manage the extended value chain.

 

Industry Success Factors

According to Tom Kippola (The Industry Standard), “By 2005, digital marketplaces will generate over half of all online commerce revenues, dwarfing the revenues generated by all other net commerce business models combined.”  Because of the way the market is trending, businesses need to be ready to deliver.  The delivery of e-commerce is very complex. It is because of this complexity that companies like i2 Technologies, specializing in Supply Chain Management and Customer Relationship Management, have a market.  These companies need to add the highest amount of value to their customers. How do they do this? i2 executives believe that the process of adding value starts with interacting with their customers to develop a strategic analysis of their customer’s corporation, then applying their appropriate product.  i2 believes it has a deep understanding of the complexity and challenges of the critical business processes required to deliver on the promise of e-business.


According to Gartner, http://www.gartner.com/webletter/i2/february/index.html there are three factors key to success in the world of e-business:

Ø      Proper demand forecasting

Ø      Quick reaction to demand signals from customers

Ø      Ensuring that supply meets production schedules

Companies like i2 provide the means to achieve these factors.  Gartner also outlines what qualities a successful Supply Chain Management/Customer Relationship Management company will have. Gartner rates companies in what they call their SCP Magic Quadrant.  The Magic Quadrant is broken into four quadrants:

Ø    Niche Players: small market segment focus and do it well or no focus and don’t outperform others

Ø    Challengers: execute well today, but not in synch with the market’s direction

Ø    Visionaries: understand where the market is going but don’t execute well yet

Ø    Leaders: execute well today, positioned well for tomorrow

To even be included in the SCP Magic Quadrant, a vendor must have a believable vision for a multi-product SCP suite with an effective distribution channel.  The suite must be integrated and have an emphasis on manufacturing planning.  In order to be considered a “leader” (like i2) a company should have the following:

Ø      Broadest offering

Ø      Strongest sales execution

Ø      Clearest vision

Ø      High degree of collaboration

Because the market is changing rapidly and new products are constantly being offered, the key to success for an offering is the easiest to integrate, most industry expertise, best strategic fit and best collaborative vision.


 

Figure E – Gartner SCP Magic Quadrant

Implementing Decisions – The 4 Ps

Product Decision

The product decision involves what product to make, when to make it, its level of quality, how many products to sell, its packaging, brand name and warranties or guarantees.  i2 Technologies decision to move from offering factory-planning solutions to supply chain optimization solutions during the 1990s proved very successful. In the late 1990s, the decision was made to develop more into an electronic business process optimization company. This decision meant that the company would need to grow and develop in ways that would require major changes in the organization or the alignment of partnerships with other companies.  Since that time, i2 Technologies has indeed made the transition through both organizational changes and partnerships. They realize, however, that to maintain such growth will require continuous innovation and product development to stay ahead of the competition.

Place Decision

The place decision is based on how the product is to be distributed.  i2 Technologies utilizes a well-educated sales force for marketing and selling its product. Because i2 Technologies has an established customer base with Fortune 500 Companies, their sales efforts are often to companies in this space and familiar with the products offered by i2.

Price Decision

The price decision deals with the methods of setting profitable and justifiable exchange values for goods and services.  For i2 Technologies, their competition is unable, in most cases, to match their product innovation and industry-specific knowledge. Where competition tries to seek an advantage is by undercutting i2 Technologies’ prices. i2 Technologies will not budge in their pricing. They feel that because their software is critical for businesses, decision-makers will not choose on price but on the best product available. With that approach, i2 Technologies continues to price their product on what they feel its value and pay little concern to how it prices against the competition.  i2 products sell for 2 – 3 million for one set of the full suite.

Promotion Decision

The promotion decision includes all decisions on educating potential customers about the product and how to develop a good public image with promotional activities.  i2 Technologies’ greatest promotion tool is its annual conference called Planet. This conference provides an opportunity for satisfied i2 users to talk about their experiences with potential i2 users, analysts, consultants and the media. At the first conference in 1992, they drew only 30. In 1998, they drew 3,000. In 2001, they drew over 6000 participants.  Planet has transformed from an annual conference to a year long series of conferences in multiple countries that provide focus in specific industries (automotive, high tech, energy and chemical, etc.).  This proves very successful in providing customers and potential customers throughout the country and the world with local venues for learning about i2 technologies’ product offering, product updates and its place in their industry.

The Future of i2 Technologies

The future of i2 can be projected based on four factors:

1)      the fundamentals of the Internet economy

2)      the industry and macro economic environment

3)      i2’s positioning in its industry and its international expansion, and

4)      i2’s ability to reach additional markets channels outside of the traditional Fortune 500


The fundamentals of the Internet economy

Moore’s law states that each new generation of chip technology, which has been released about every 18 months, can pack the same number of elements into half the space. Alternatively, twice as many components get packed into the same surface area to create twice as much power. Moore’s law implies that digital economy can significantly contribute to cost saving.

 

Metcalfe’s law

 states that the value of a network increases with the square of the number of participants.  Metcalfe’s law indicates that the more the participants, the greater the value to each participant.

 

 

Clearly i2 is in a position to exploit both of these laws, by bringing more computing power to the end user and creating a network of buyers and sellers and extending the supply chain management concepts through the Internet.

 

The Economic Downturn and E-business Industry

2001 has seen the weakest economic conditions so far for the past decade. Many technology companies reported lower than expected earnings. Every sign points to the slow down of the economy.  In the December 28, 2000 edition of The Wall Street Journal, it was estimated that IT spending would slow to 12% growth this year, compared to 22% and 26% in 2000 and 1999, respectively.  Although the economy and IT spending is slowing down, it doesn’t mean the e-business investments will suffer.  In fact, the slowing economy makes cost reduction more important than ever before.  According to Moore’s law, the digital economy provides a very cost effective solution to business issues.  In fact, AMR Research recently surveyed senior executives from the Manufacturing, Retail, Financial Services, and Energy industries. They found that e-business initiatives are focused on streamlining costs, improving relations with customers, improving sales and channel management, and gaining transaction efficiencies in supply chain management and procurement. The data is clear that spending and company execution plans, even amid a downturn economy, remain strong:

The survey results make it clear that achieving sell-side and buy-side transaction efficiencies continues to be important, and it may become more vital because of economic pressures. AMR Research expects that companies will maintain or even expedite these fast Returns on Investment (ROIs). As a result, even as technology spending slows, companies that lead supply chain management and procurement, trading exchange infrastructure, and sales and channel management software sectors, such as Ariba, Commerce One, i2 Technologies, Oracle, PeopleSoft, SAP, and Siebel, are well positioned to remain successful in 2001.
AMR Research recently analyzed the overall potential for supply chain value creation through B2B investments. In this analysis, they estimated incremental operating margin improvement to be between $215B and $465B per year in the United States alone within this decade. With so much up for grabs, it's not surprising that even during an economic downturn only 14% of companies would decrease spending on e-business initiatives. In contrast, 23% of companies would increase spending in selected areas (sales and customer management in financial services and supplier management in manufacturing) because of a downturn.

The eMarketplace Shakeout and Consolidation

The Forrester Report predicted an eMarketplace shakeout back in August 2000. They argued that over the next three years, eMarketplaces will go through a massive consolidation, leaving fewer than 200 survivors. However, supply chain vendors win, no matter what.

i2 Technologies wins -- either way.

By 2003, many corporations will be using vertical hubs to coordinate development planning and supply chain activities. In the meantime, however, companies looking for quick hits will continue with their individual efforts to streamline processes like inventory buffering and contract management. Vendors like i2 Technologies that have a foot in both the supply chain and eMarketplace worlds will win in both cases.

            -- Forrester, August 2000

AMR Research also envisions the rise and fall of the Internet revolution, as did the automobile manufacturers and mini-computer companies. Most start-ups will fail, and winners are few.  Companies that invest wisely to improve supply chain performance through customer and supply chain management initiatives will benefit and gain competitive advantage.

International expansion

Although i2 Technologies is growing rapidly in the U.S., it faces great challenge for Europe expansion. Europe is the largest market outside of the U.S.  i2 Technologies hosted Europe's largest e-business conference ever in Vienna, Austria, during May 2000. There is a long way to go for Europe market entry.  Computer Weekly, May 18, 2000 issue reported that i2 Technologies had blamed a lack of leadership in large companies for the 12-month lag between Europe and the US on the development of business-to-business marketplaces. AMR Research December 2000 issue noted that U.S. e-Marketplace companies’ expansion to Europe and Middle East requires complex logic, such as tax processing, and language functionality, which often result in the implementation of a new product or a major reconstruction of the existing site. Most of these U.S. companies do not have the expertise to implement these additions, especially because many require a fundamental alteration to their core architectural approach.

Additional Market Channels

Although i2 is well positioned with the fortune 500, the sheer costs of the software, let alone the implementation expenses are insurmountable to any company without the financial leverage to support the purchase.  i2 must aggressively move to partner with ASPs and hosting partners to provide an access to the mid and lower level company looking to obtain supply chain management software and/or marketplace software.  Other companies, like Oracle and Commerce One, are aggressively moving into this space and have signed agreements for ASP and hosting services with capable vendors.  The challenge is to establish a foothold that can be used to launch other products and further carve out market share from i2.

Figure F – Some of i2’s Select Customers

To find out more about i2 customers click on the link below:

http://www.i2.com/main/server_media/media/00916610-0E9B-11D5-9EE6-0008C7FA726A.pdf

Summary

i2 faces significant challenges, from vary capable competitors moving into the lucrative supply chain management space. In addition, several marketplaces that were implemented with the i2 software have failed or gone out of business due to the lack of sufficient transactions and key participants (anchor tenants) to drive the market.  The NASDAQ continues its downward slump and i2 stock, which is generously given to employees as incentives, is virtually worthless at this time.  If the value of a software company is measured by its intellectual capital that creates the software, then i2 must develop an alternative means to reward and keep its employees if it is to remain competitive.  As Sanjiv stated in his recent communication to all i2 employees regarding the troubled stock, the Nike situation and the pending stockholder suit, “i2 has experienced a long record of achievements, with major customer wins, outstanding new technology and revenue topping $1.1 Billion last year.  But even the most successful companies face challenges, and i2 is no exception.